Workers comp expanding to farms

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As they have been in place for some 20 years, Louisiana and Arkansas ginners are well aware of the self-insured workers compensation programs overseen by Terry Duke. Few farmers know the programs are also open to them.

The LAC Self-Insured Fund (for Louisiana) and AG Compensation Self-Insurer Fund (for Arkansas) have “saved gins a ton on money on workers comp and can do the same for farmers,” says Kevin Watts, manager of the McGehee Producers Gin in southeast Arkansas. “Everyone needs to know this is available in Louisiana and Arkansas. The yearly dividend it provides means some really impressive savings.”

Watts, the 2010 Southern Cotton Ginners Association (SCGA) ginner of the year, says McGehee Producers was “among the original sign-ups for the program and have never regretted it. It’s just a good deal.”

Duke, based in north Louisiana, spoke with Delta Farm Pressin mid-January about the programs’ structures, benefits, and fraternity of members. Among his comments:

On the programs’ evolution…

“We have similar programs in both Louisiana and Arkansas. The programs basically began with cotton gins and warehouses and those are still a focus. But we now work with more farms than anything else. The programs have kind of evolved.

“The difference between the states is in Louisiana the law requires farms to carry workers compensation insurance. Arkansas, Tennessee and Mississippi don’t require that.”

History of the programs? A timeline?

“The Louisiana program — the LAC Self-Insured Fund — began in 1989. It was set up when our clients began complaining about the cost of workers comp: it wasn’t affordable and there weren’t many insurance companies willing to write it.

“So, we decided to become self-insured. In other words, to handle our own claims like Wal-Mart, for example. In 39 states, laws allow for businesses to pool together and have more buying power.

“The cheapest way to handle workers comp claims, if you have the financial wherewithal, is to just pay them when they come due. The only thing such pools have to do different is to hire someone to administer the program and manage it day-to-day.

“We buy excess insurance. We have re-insurance that attaches after we pay a deductible of $400,000. Then, we have statutory coverage above that. That means if we have a client that has a busload of people that’s run over by a train and workers comp is lifetime medical benefits, that could be a $50 million or $100 million claim. That’s how much insurance we have above the first $400,000. So, in that sense, we’re not totally naked.”

On the Arkansas program…

“About 1991, the Agricultural Council of Arkansas was hearing similar work comp complaints. Cecil Williams (director of the council at the time) asked if we could start a program in the state. That began in 1992. The program has a board of directors elected by the membership.

“The big difference in Arkansas is the law doesn’t require a farmer to carry workers compensation. The state allows the employer to buy ‘employer’s liability.’ This is an endorsement to the general liability policy — the same one that covers the farmer if he runs over someone in a tractor.

“The policy says, ‘We’ll defend you and pay claims on your behalf arising out of employment.’ It provides around $15,000 for a ‘medical payment.’ That sum used to be pretty ample. Over time, though, the $15,000 number hasn’t changed but the cost of medical care has risen significantly. You can run through $15,000 pretty quick in medical bills.

“After that $15,000 is spent, the policy doesn’t pay more. At that point, the employee has to sue the farmer to get more.”

What grounds are there to sue in such cases?

“Well, there’s case law that says there are certain duties an employer has to the employee. Those duties include things like providing a safe workplace, providing safe tools and equipment, the duty to inspect premises and advise of any hazards.

“That’s only important because in almost every employee injury that occurs in Arkansas, you can almost always find some ‘duty’ the employer breached that allows the employee to collect benefits. The farmer’s general liability policy will have a limit of, probably, $500,000 or $1 million.

“Let me give you an actual Louisiana case we handled in the fall of 2004. A 24-year-old college-educated male was working for his uncle, cleaning out the header of a cotton-picker. It was running and someone came up and didn’t realize this fellow was sitting near the front wheel.

“Before the guy could move, the picker was on top of him. He had multiple fractures of the spine, a ruptured spleen, a ruptured diaphragm, a non-functioning kidney, had to have a tracheotomy and was paralyzed from the waist down.

“Well, you have to make a calculation about what a claim is worth. The projected medical expense for the case was about $3.1 million. But that didn’t include things like pain and suffering and mental anguish and other things. It could have easily been a $7 million claim.

“Imagine you’re sitting there with a $1 million general liability policy and a $1 million umbrella policy — $2 million worth of coverage. There are employee injuries that can happen on the job that easily exceed that liability limit.”

On workers comp and “exclusive remedy”…

“Arkansas law also says if you carry workers comp, it becomes the employee’s exclusive remedy and he can’t sue you for more. Workers comp provides lifetime medical benefits and limited wage replacement without question or fault.

“There was an interesting case in Arkansas where a farmer didn’t carry workers comp. He also had a small fertilizer operation where, by law, he had to carry workers comp.

“One day, the fertilizer employees were making a delivery to his farm and saw a farmhand on the side of the road with a broken-down vehicle. They picked him up to carry him back to the farm. On the way, they were hit by a train.

“The farm employee was injured the worst and, after about a month, died. You can imagine the bill for 30 days of intensive care. The $15,000 went quick.

“At that point, the poor family had to sue the farmer. Well, he had to go stand beside the insurance company in court. What an awkward position. He wanted the dead employee’s family to receive compensation but was forced to be on the other side.

“After that, he bought coverage from us and said he’d never be without workers comp again. If he’d had it originally, it would have paid a reasonable amount for that death and paid all the medical bills.

“In Arkansas, we now have around 280 members in the program. Over 100 of them are farms.”

On the co-op aspects of the programs…

“If we don’t spend all the money on claims, it goes back to the members. It’s like a co-op.

“In both programs, we’ve given money back every year. Since the programs have been in effect we’ve given back, conservatively, $50 million. I’m signing checks to members right now.

On expansion, liability and “fraternity”…

“Keep in mind, we have 300, or so, accounts. In the real world, that’s pretty small.

“We write virtually all the gins and farm supply stores and, increasingly, farms. But farms are the one thing we have a hard time getting to. We aren’t sure when their insurance comes up for renewal and you can’t just go knocking door-to-door.

“We do one thing in Louisiana and may implement in Arkansas. Consider the farmer who had the employee hit by the train. What if he’d called and asked for coverage? I’d sit there thinking, ‘Should I write this, or not? He’s going to pay $5,000 worth of premium and just had $200,000 in claims.’

“I can look at the numbers all day long and still can’t make a values judgment. For that reason, we implemented a referral program.

“The downside of this program is that members can be held liable — it’s like co-signing a note at the bank. If we can’t pay our obligations, the state can look at any one fund member and say, ‘I think you’ve got a lot of resources and I’m coming after you.’

“That’s one reason we’ve been as conservative as we have been. We want to ensure we collect enough money to pay for anything. Currently, the Louisiana program has $25 million and the Arkansas program has $12 million — probably $10 more than its liabilities. So, we’ve been very conservative.

“That’s carried over to the referrals. If someone wants to join, we provide a membership list and say ‘we want you to see who you’re getting into bed with. Now, give me the names of five members who will recommend you for membership. I’m going to contact three of them for referrals.’

“We write those members a letter saying, ‘Farmer Joe is applying for membership. Can you vouch for his operation and/or his character?’

“I’ve had phone calls from members saying, ‘Man, I love going to the duck blind with this guy. He’s great. But his operation is too shaky.’

“It’s kind of a fraternity. We have small boards, don’t have bureaucracy and have a good thing going — never had a year when we haven’t returned a lot of money. The members are very protective. Why would you want to include someone who causes problems?”

Other keys to success…

“Another key to our success was hiring claims people. They only handle claims for our self-insurance funds. They get to know members.

“In some cases, we’ve had multiple claims from the same employee. You kind of get to know who you’re dealing with. Say, someone would have a claim at a gin one year and causes a problem. The next year, he’s gone to work at another gin and has another claim. Well, our claims people know his routine the second time around.”

What about the SCGA safety program?

“We work closely with the SCGA safety program. We saw right off the bat that only makes sense. We both preach gin safety and the SCGA program has been very successful.

“We’ve done a great job in reducing claims even as medical costs have continued to rise. This past year in Arkansas, we had a total of about 152 claims. There were only two other years the claims were so low — the first two we were in business. And back then, we probably had a third of the current membership. So, our exposure is tripled and yet we have fewer claims.

“The same is true in Louisiana. In 2009, we had the fewest claims ever — around 128. That goes back to when we had 60 members while we now have nearly 600.

“Part of the reason for fewer injuries is the checks the members get back. Yesterday, I wrote a check to an Arkansas gin for $48,000. Their premium for 2010 was $110,000. You write a check for $110,000 and that’s a big ticket. But it isn’t nearly as hard if you get $48,000 back. Safety does pay. You know members think, ‘If we don’t pay this out in claims, it’s coming back.’ That’s a powerful incentive to change behavior.”

Any calls to expand into other states?

“Not right now.

“Again, we’re very conservative in our approach. When we started programs in both Louisiana and Arkansas we said, ‘If we start this, we need a critical mass from Day One. What if, three months in, someone has a terrible accident and four employees are hurt very bad?’ Everyone that may have been thinking about joining will say, ‘Wait a minute. I’m waiting to see how that pans out.’

“So, we came to a conclusion that we’d start on a given day and wanted everyone to write a check and pay their premium up front. If you deal with an insurance company, you may pay monthly, quarterly, semi-annually. So paying up front can be a big deal.

“However, we needed enough funds right off the bat. Anytime you start something like this, you have to put up money with the state, security, buy reinsurance contracts, hire folks to handle claims, attorney fees for bylaws, and other start-up costs. You’d better have enough money to pay claims when the door opens. It’s too risky otherwise.

“Also, the insurance market is more competitive than when we started these programs. When we started, there was pain in the farming community. And that’s what is needed when you’re making major change — and our approach was radical compared to the normal way of buying insurance.

“My philosophy is, ‘If self-insurance is the better deal, buy it. If it isn’t, go back to regular insurance.’ It depends on a farmer’s circumstances.

“One thing I’ve found is this type of insurance program works well in agriculture because farmers are already familiar with co-ops. Even though gins and warehouses may compete, if they can lower costs together then they’ll cooperate.

“Once a program like this is up and running it’s almost self-perpetuating. Members see it has an advantage.”

Typical questions from farmers?

“Everyone is interested in the timing of dividends. In Arkansas, state law requires that the payment is held for a year. In agriculture, most claims occur in the fall when harvest is happening, gins are running and trucks are moving. Claims can come in December and sometimes it takes months — sometimes years — before claims are closed.

“Because of all that we give the money back slowly. The first year in, you may only get 5 percent. The second year you’re in, we’ll have a better handle on the first year’s claims so you may get 10 percent. It’s almost like a matrix that takes two or three years to build up. You’ll still get the money, though.

“Another big topic is joint liability risks. But they should know we buy aggregate excess insurance. I can calculate that in a given year, the most we could lose is X amount — maybe $200,000. Well, at the first of the year can a farmer say how much he can potentially lose? We can tell that.

“The way we collect money is the same way we pay money back: take your premium, divide it by the whole for a percent. That way I can look at a worst-case scenario and if we have to collect reinsurance — say there’s a gap of $200,000 — your share will be an additional $1,400. That helps put farmers at ease.”